Judge backs Legislature in sweep of foreclosure funds

The Legislature’s decision to sweep $50 million intended to help the state with the consequences of the foreclosure crisis was legal, according to a Maricopa County judge.

Superior Court Judge Mark Brain ruled today that the Legislature, not the Attorney General’s Office, has the power to determine how the money is spent. He concluded that the Legislature had the right to sweep the money into the state’s general fund, and dismissed the case.

The funds were part of a $97.7 million settlement awarded to Arizona as part of a multistate lawsuit against five banks.

The Arizona Center for Law in the Public Interest, a liberal advocacy group, filed suit to stop the sweep, which was part of the fiscal year 2013 budget. The center argued that the sweep violated the settlement with the banks, which stated that Attorney General Tom Horne shall direct the use of the funds. The center also contended that the court-ordered trust decreed by the settlement constituted a charitable trust.

But Brain ruled that though the consent decree with the banks “loosely” uses the term ‘trust,’ there was no “clear and unequivocal intent” to create a trust, and that Horne had no right or authority to unilaterally control the money.

“It is one thing to say that the attorney general will negotiate the resolution of various claims, but another thing entirely to say that in doing so, the attorney general can transform money owed the state … to money held in trust for whatever the attorney general wants,” Brain wrote. “The Legislature controls the power of the purse, not the attorney general.”

The Governor’s Office applauded the ruling.

“That’s great news. The judge has upheld the authority of the Legislature to appropriate in the state of Arizona,” Brewer spokesman Matthew Benson said. “Certainly the court has validated the actions of the governor and the Legislature as it pertains to the mortgage settlement money.”

The settlement said the money should be used to “ameliorate the effects of the foreclosure crisis,” strengthen law enforcement efforts to prosecutor financial fraud and to compensate the state for costs resulting from the “alleged unlawful conducts” of the banks. Republican lawmakers and Gov. Jan Brewer argued that the sweep was justified because the state suffered a severe revenue shortfall due to the housing crisis and the resulting economic downturn.

Attorney Tim Hogan of the Arizona Center for Law in the Public Interest said he hasn’t spoken with his clients yet, but that it’s likely they’ll appeal the decision. The center filed the suit on behalf of two homeowners facing foreclosure.

“The money should be spent on the purposes specified in the settlement. And instead, this money just got dumped into the general fund,” Hogan said.